Cost is More Than Just the Money Out of Your Pocket
One of the most enduring lessons in my life comes from a high school Accounting class1 where we learned about opportunity cost. It’s the potential loss you’ll experience when choosing one thing over another.
The concrete example from the class was that if we choose to go to a concert on a Friday night instead of working, the opportunity cost is the wages we’d make. And if we’re paying for the concert out of pocket, it’s lost wages + the cost of going to the concert.
When it comes to out-of-pocket expenses, choosing to go to a concert, or on a vacation, instead of working might be an easier choice for many adults. Those are expenses we don’t mind paying.
But what about when it’s money we don’t want to spend vs. some positive outcome?
Think Beyond Money Out of Pocket
Perhaps that lesson hit especially hard in high school because I was already running my own business, and there was an actual dollar amount assigned to my hours2, for work I enjoyed doing. And I carry that lesson today because 20 years later, that is still true.
But it’s easy to look at the concrete cost and assume that’s a bigger cost. After all, seeing an actual debit from your bank account sticks more than the imaginary dollars you’d make when doing an opportunity cost evaluation.
But, especially if you’re a business owner, you need to think about opportunity cost a lot more, for your bottom line, and for your mental health.
My Miscalculation with Daycare
When my wife was heading back to work after her maternity leave ended in March, we sat down and had to answer the question, “what are we going to do with Abby?”
Teresa (5) is in school 5 days a week. Lou (1.5) is in daycare 3 days a week, covering my wife’s shifts most weeks. But we weren’t sure what do to with 3-month-old Abby.
I decided I was willing to sacrifice some work days to keep her home a little longer, but that we’d put her in daycare closer to 6 months, which is now3.
The miscalculation came in because we decided to drop Lou down to 2 days, and put Abby in for 2 days, because of the cost. I’d still lose 4-5 workdays a month because at the time we didn’t feel we could pay the extra for 3 days per week per kid4.
The extra cost of putting Lou and Abby in daycare so I could work an extra day was less than $150.
Reading that sentence out loud, it should be an easy decision, right? Surely a full extra workday per week would net me more than $150.
But we looked at the cost out of pocket in a vacuum and decided against it.
Luckily, we were able to change it for both kids and they will be in daycare 3 full days per week, I will have full work weeks again.
It’s Important to Consider Opportunity Cost
For much of the last 3 months, I was working with a negative margin. I simply did not have the time to do everything I needed to do for my business, for the kids, and for the household. I tried to cram in work whenever I could, which put undue stress on me and my wife.
And while sometimes you need to do that for a short period of time, I nearly decided to continue that lifestyle for another 3+ years, until all 3 of our kids go to school full-time…over $150 per week.
When you’re weighing decisions, especially as a business owner, you need to consider the opportunity costs — whether it’s for something important like daycare, or evaluating if you should do it yourself vs. paying for a service.